KIPP DC And Affiliates. Consolidated Financial Report June 30, 2012

Transcription

1 Consolidated Financial Report June 30, 2012

2 Contents Independent Auditor s Report On The Financial Statements 1 Financial Statements Consolidated Balance Sheets 2 Consolidated Statements Of Activities 3 Consolidated Statements Of Cash Flows Independent Auditor s Report On The Supplementary Information 18 Supplementary Information Consolidating Balance Sheet 19 Consolidating Statement Of Activities 20 Consolidated Statement Of Functional Expenses 21

3 Independent Auditor s Report To the Board of Directors KIPP DC Washington, D.C. We have audited the accompanying consolidated balance sheets of KIPP DC and Affiliates (KIPP DC) as of June 30, 2012 and 2011, and the related consolidated statements of activities and cash flows for the years then ended. These consolidated financial statements are the responsibility of KIPP DC s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of KIPP DC s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KIPP DC and Affiliates as of June 30, 2012 and 2011, and the changes in their net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our reports, dated October 31, 2012, and October 27, 2011, on our consideration of KIPP DC s internal control over financial reporting and on our tests of their compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of those reports is to describe the scope of our testing of internal controls over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal controls over financial reporting or on compliance. Those reports are an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. Gaithersburg, Maryland October 31,

4 Consolidated Balance Sheets June 30, 2012 And 2011 Assets Current Assets Cash and cash equivalents $ 20,926,629 $ 15,492,746 Investments 21,831,442 16,014,535 Receivables 2,813,891 3,756,663 Prepaid expenses 889,714 1,399,307 Promises to give 248, ,500 Total current assets 46,710,191 36,976,751 Promises To Give, net of discount and current portion 127, ,946 Unrestricted Investments 1,225,000 - Restricted Cash 4,272, ,435 Restricted Investments 1,239,641 1,239,591 Deferred Rental Income 48,741 41,035 Note Receivable 17,705,702 - Property And Equipment, net 79,982,055 68,398,811 Interest Rate Cap 6, ,000 Debt Issuance Costs, net 1,572,648 1,312,614 Sinking Fund 58,344 36,258 Deposits 151, ,041 $ 153,100,649 $ 108,780,482 Liabilities And Net Assets Current Liabilities Accounts payable and accrued expenses $ 3,560,973 $ 1,650,710 Refundable advances - 454,651 Current portion of capital lease obligations 72,257 74,051 Current portion of notes payable 2,842, ,488 Deferred revenue 3,217, ,372 Total current liabilities 9,693,271 3,597,272 Deferred Rent 327, ,693 Capital Lease Obligations, net of current portion 1,249,648 1,231,905 Notes Payable, net of discount and current portion 80,669,582 54,774,488 91,939,615 59,780,358 Commitments And Contingencies (Note 11) Net Assets Unrestricted 60,363,692 48,014,678 Temporarily restricted 797, ,446 61,161,034 49,000,124 See. 2 $ 153,100,649 $ 108,780,482

5 Consolidated Statements Of Activities Years Ended June 30, 2012 And Temporarily Temporarily Unrestricted Restricted Total Unrestricted Restricted Total Support and revenue: Pupil allocation $ 41,184,540 $ - $ 41,184,540 $ 28,895,346 $ - $ 28,895,346 Contributions, grants, and events 2,451,910 1,578,393 4,030,303 10,995, ,053 11,361,604 Federal grants and entitlements 8,350,920-8,350,920 6,168,777-6,168,777 Investment income 77,946-77,946 61,144-61,144 Interest income 173, , Sublease rental income 109, , , ,006 Loss on interest rate caps (190,488) - (190,488) (112,486) - (112,486) Other 406, , , ,549 Net assets released from restrictions 1,766,497 (1,766,497) - 723,956 (723,956) - Total support and revenue 54,331,232 (188,104) 54,143,128 47,712,843 (357,903) 47,354,940 Expenses: Program 37,154,527-37,154,527 29,892,958-29,892,958 General and administrative 4,319,720-4,319,720 3,571,233-3,571,233 Fundraising 507, , , ,800 Total expenses 41,982,218-41,982,218 33,784,991-33,784,991 Change in net assets 12,349,014 (188,104) 12,160,910 13,927,852 (357,903) 13,569,949 Net assets: Beginning 48,014, ,446 49,000,124 34,086,826 1,343,349 35,430,175 Ending $ 60,363,692 $ 797,342 $ 61,161,034 $ 48,014,678 $ 985,446 $ 49,000,124 See. 3

6 Consolidated Statements Of Cash Flows Years Ended June 30, 2012 And Cash Flows From Operating Activities Change in net assets $ 12,160,910 $ 13,569,949 Adjustments to reconcile change in net assets to net cash provided by operating activities: Non-cash acquisition of leasehold improvements - (3,144,926) Depreciation and amortization 2,140,491 2,271,862 Loss on interest rate caps 190, ,486 Realized and unrealized gain on investments (2,203) - Gain on disposal of property and equipment (3,080) (1,165) Interest expense in excess of capital lease payments 15,949 20,302 Discount on promises to give (8,002) (1,655) Discount on notes payable 33,031 88,887 Changes in assets and liabilities: (Increase) decrease in: Receivables 942,772 (1,842,189) Prepaid expenses 509,593 (907,175) Promises to give 242, ,000 Deferred rental income (7,706) (93,475) Deposits 14,175 (56,245) Increase (decrease) in: Accounts payable and accrued expenses 207, ,303 Refundable advances (454,651) 420,568 Deferred revenue 2,352, ,716 Deferred rent 150, ,870 Net cash provided by operating activities 18,485,252 11,905,113 Cash Flows From Investing Activities Purchases of property and equipment (12,089,212) (7,101,324) Sales of property and equipment 210,625 - Purchase of investments (12,245,492) (5,283,334) Issuance of notes receivable (17,705,702) - Sales of investments 5,204,528 - (Increase) decrease in restricted investments (50) 1,454,707 (Increase) decrease in restricted cash (4,063,316) 4,125,470 Net cash used in investing activities (40,688,619) (6,804,481) Cash Flows From Financing Activities Principal payments on long-term debt (868,487) (1,852,662) Proceeds from long-term debt 29,020,000 - Purchase of interest rate cap (93,750) - (Increase) decrease in sinking fund (22,086) 2,091 Debt issuance costs (398,427) - Net cash provided by (used in) financing activities 27,637,250 (1,850,571) Net increase in cash and cash equivalents 5,433,883 3,250,061 (Continued) 4

7 Consolidated Statements Of Cash Flows (Continued) Years Ended June 30, 2012 And Cash And Cash Equivalents: Beginning 15,492,746 12,242,685 Ending $ 20,926,629 $ 15,492,746 Supplemental Disclosure Of Cash Flow Information Cash payments for interest, net of interest capitalized of (2012 $109,970; 2011 $0) $ 1,781,348 $ 1,655,444 Supplemental Schedule Of Noncash Investing And Financing Activities Property and equipment included in accounts payable and accrued expenses $ 1,745,211 $ 169,320 Noncash acquisition of leasehold improvements $ - $ 3,144,926 See. 5

8 Note 1. Nature Of Activities And Significant Accounting Policies Nature of activities: KIPP DC and Affiliates is comprised of four entities: KIPP DC, Woodrock LLC, KIPP DC Douglass QALICB, Inc. (Douglass QALICB), and KIPP DC Shaw QALICB, Inc. (Shaw QALICB). KIPP DC was organized for the purpose of operating a public charter school for educationally underserved children residing in Washington, D.C. to develop the knowledge, skills, and character needed to succeed in top-quality high schools, colleges, and the competitive world beyond. KIPP DC operates independently and has its own Board of Directors responsible for its operation but elects to have membership in the KIPP Network of Schools. KIPP DC operates nine schools: three early childhood schools (LEAP Academy, Discover Academy, and Grow Academy); two elementary schools (Promise Academy and Heights Academy); three middle schools (KEY Academy, AIM Academy, and WILL Academy); and one high school (KIPP DC Collegiate Preparatory). On September 6, 2006, KIPP DC purchased 100% of the interest in Woodrock LLC (Woodrock). Woodrock holds the lease for the property and improvements at 421 Alabama Avenue, SE in Washington, D.C.; this lease is Woodrock s only activity. KIPP DC is the sole member of Woodrock, and the company is a disregarded entity for tax purposes. On May 7, 2009, KIPP DC obtained a master loan and disbursement agreement (the Agreement) in the principal amount of $13,859,486 by entering into a transaction structured to qualify for the New Markets Tax Credit (NMTC), as outlined in Internal Revenue Code (IRC) Section 45D. An additional $10,000,000 was disbursed under this transaction on September 1, As part of the transaction, KIPP DC formed KIPP DC Douglass QALICB, Inc. (Douglass QALICB) to meet the necessary structuring requirements to qualify for the NMTC. Douglass QALICB is a non-profit corporation formed under the laws of the District of Columbia. The Agreement was established to fund the development and renovation of the property located at 2600 Douglass Road, SE, Washington, D.C. (the Property) for use as an educational facility that will house an early childhood school, an elementary school, a middle school, and a college preparatory high school. KIPP DC is the leasehold owner of the Property pursuant to a Ground Lease Agreement dated March 6, 2009, between the District of Columbia, a municipal corporation by and through its Chief Property Management Officer on behalf of the Department of Public Schools, as lessor, and KIPP DC, as lessee. KIPP DC assigned the lease to Douglass QALICB and Douglass QALICB, in turn, subleased the Property back to KIPP DC. On October 4, 2011, KIPP DC entered into a credit agreement in the principal amount of $23,520,000 as part of the transaction structured to qualify for the NMTC, as outlined in IRC Section 45D. As part of the transaction, KIPP DC formed KIPP DC Shaw QALICB, Inc. (Shaw QALICB) to meet the necessary structuring requirements to qualify for the NMTC. Shaw QALICB is a not-for-profit corporation formed under the laws of the District of Columbia. The agreement was established to fund renovations at the Shaw Campus for use as an educational facility that will house an early childhood school, an elementary school, and a middle school. KIPP DC is the leasehold owner of the property pursuant to a Ground Lease Agreement dated August 11, 2011, between the District of Columbia, as lessor, and KIPP DC, as lessee. KIPP DC assigned the lease to Shaw QALICB and Shaw QALICB, in turn, subleased the property back to KIPP DC. In the accompanying notes to the consolidated financial statements, KIPP DC and Affiliates are collectively referred to as KIPP DC. A summary of KIPP DC s significant accounting policies follows: Basis of accounting: The accompanying consolidated financial statements are presented in accordance with the accrual basis of accounting, whereby, revenue is recognized when earned and expenses are recognized when incurred. 6

9 Note 1. Nature Of Activities And Significant Accounting Policies (Continued) Principles of consolidation: The accompanying consolidated financial statements include the accounts of KIPP DC, Woodrock, Douglass QALICB, and Shaw QALICB. All significant intercompany balances and transactions have been eliminated in the consolidation. Basis of presentation: The financial statement presentation follows the recommendations of the Financial Accounting Standards Board (FASB) Accounting Standards Codification. As required by the Not-for-Profit Topic of the FASB Accounting Standards Codification, Financial Statements of Not-for-Profit Organizations, KIPP DC is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. KIPP DC did not have any permanently restricted net assets at June 30, 2012 and Charter school agreement: On June 4, 2001, KIPP DC entered into a 15-year Charter School Agreement (the Agreement) with the District of Columbia Public Charter School Board. Under the terms of the Agreement, KIPP DC will operate a school for students of certain ages in grades five through eight. On June 19, 2006, the Agreement was amended to include elementary school grades, as well as high school grades. Cash and cash equivalents: KIPP DC considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Financial risk: KIPP DC maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. KIPP DC has not experienced any losses in such accounts. KIPP DC believes it is not exposed to any significant financial risk on cash. Receivables: Receivables are carried at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and using historical experience applied to an aging of accounts. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. Management believes that an allowance was not required based on its evaluation of collectability of receivables at June 30, 2012 and Promises to give: Contributions are recognized when the donor makes a written promise to give that is, in substance, unconditional. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire in the fiscal year in which the contributions are recognized. The allowance for doubtful promises to give is based on management s evaluation of the status of existing promises to give and historical results. Management believes all promises were collectible and no allowance was necessary at June 30, 2012 and Investments: Investments in equity securities with readily determinable fair values and all investments in debt securities are reflected at fair market value. To adjust the carrying value of these investments, the change in fair market value is recorded as a component of investment income or loss in the consolidated statements of activities. Property and equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful life of the related asset, ranging from 3 to 40 years. Normal repairs and maintenance are expensed as incurred. KIPP DC capitalizes information technology equipment purchased with a cost of $5,000 or more and all other property and equipment purchased with a cost of $2,500 or more. 7

10 Note 1. Nature Of Activities And Significant Accounting Policies (Continued) Valuation of long-lived assets: As required by the FASB Accounting Standards Codification Topic, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets and certain identifiable intangible assets are to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reportable at the lower of the carrying amount or fair value, less costs to sell. Interest rate cap agreement: The fair values of the two interest rate cap agreements are the estimated amount that KIPP DC would receive to sell the cap agreement to a market participant at the reporting date, taking into account current interest rates and the current credit worthiness of the cap counter parties. Loan issuance costs: KIPP DC paid certain customary fees, as required, to secure the notes payable used to finance the construction of its new schools. These fees have been capitalized and are being amortized over the term of the notes payable using the effective interest method. Allocation of expenses: Expenses are either directly charged to program services as incurred or proportionately allocated to functional categories based on various allocation methods. Net assets: Unrestricted net assets are the net assets that are neither permanently restricted nor temporarily restricted by donor-imposed stipulations. Temporarily restricted net assets result from contributions whose use is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of KIPP DC pursuant to these stipulations. Temporarily restricted net assets are reported as unrestricted net assets if the restrictions are met in the same period received. Net assets may be temporarily restricted for various purposes, such as use in future periods or use for specified purposes. Temporarily restricted net assets were released from restrictions during the years ended June 30, 2012 and 2011, for various purposes, including elementary school development, new school start-up, college access programs, and music and art. At June 30, 2012 and 2011, temporarily restricted net assets represented amounts restricted for specific education-related expenses. Per-pupil allocation: KIPP DC receives a student allocation from the District of Columbia to cover the cost of academic and facilities expenses. Pupil allocation revenue is recognized in the period when it is earned, which is the school year for which the allocation is made. Unearned pupil allocation received is recorded as deferred revenue. Grants: KIPP DC receives grants from federal agencies and private grantors for various purposes. Receivables related to grant awards are recorded to the extent unreimbursed expenses have been incurred for the purposes specified by an approved grant or award. KIPP DC defers grant revenue received under approved awards from grantors to the extent it exceeds expenses incurred for the purposes specified under the grant restrictions. These deferred grants are recorded as refundable advances. 8

11 Note 1. Nature Of Activities And Significant Accounting Policies (Continued) Sublease rental income: Sublease rental income is being recognized on a straight-line basis based on the aggregate minimum rental payments called for in the lease agreements over the applicable lease terms. Contracts: Revenue under contracts is recognized as earned. Fair value of financial instruments: The carrying amounts, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate fair value because of the short-term maturity of these instruments. The carrying amount of long-term debt approximates fair value, because the interest rates on these instruments fluctuate with market interest rates offered to KIPP DC for debt with similar terms and maturities. Tax status: KIPP DC is a tax-exempt organization under Section 501(c)(3) of the IRC and is not considered to be a private foundation. KIPP DC is exempt from federal taxes on income other than unrelated business income. KIPP DC did not have any net unrelated business income for the years ended June 30, 2012 and Douglass QALICB is a District of Columbia non-stock, non-profit organization. Shaw QALICB is a District of Columbia non-stock, non-profit organization. Douglass QALICB will file for tax-exempt status under Section 501(c)(2) of the IRC. KIPP DC follows the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, KIPP DC may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statements of activities. KIPP DC files income tax returns in the U.S. federal jurisdiction. As of June 30, 2012, there were no material unrecognized/derecognized tax benefits or tax penalties or interest. Generally, KIPP DC is no longer subject to U.S. federal income tax examinations by tax authorities for years before Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the 2012 consolidated financial statements, with no effect on previously reported change in net assets. Subsequent events: Subsequent events have been evaluated for disclosures through October 31, 2012, which is the date the consolidated financial statements were issued. 9

12 Note 2. Restricted Cash Under the terms of certain notes payable and construction agreements, KIPP DC is required to maintain minimum balances with financial institutions. In addition, unspent proceeds from notes payable are restricted for specific purposes. At June 30, 2012 and 2011, $4,272,751 and $209,435 in cash and cash equivalents was restricted for these purposes. Note 3. Promises To Give Promises to give at June 30, 2012 and 2011, consist of the following: One year or less $ 248,515 $ 313,500 One to five years 130, , , ,000 Less discount on promises to give (2,552) (10,554) $ 375,963 $ 610,446 Note 4. Investments Investments at June 30, 2012 and 2011, consist of the following: Certificates of deposit $ 14,530,768 $ 8,713,973 Money market funds 7,300,674 7,300,562 Current investments 21,831,442 16,014,535 Non-current certificates of deposit 1,225,000 - $ 23,056,442 $ 16,014,535 Investment income for the years ended June 30, 2012 and 2011, consists of the following: Interest and dividends $ 75,743 $ 61,144 Realized and unrealized gain 2,203 - $ 77,946 $ 61,144 10

13 Note 5. Property And Equipment Property and equipment at June 30, 2012, consist of the following: Estimated Accumulated Net Depreciation Asset Category Useful Lives Cost Depreciation Value Expense Land $ 5,800,235 $ - $ 5,800,235 $ - Building and improvements 28 to 40 years 31,345,368 3,466,506 27,878,862 1,787,503 Computer equipment 3 years 415, , ,264 93,149 Furniture and equipment 5 years 276, ,510 87,899 97,205 Leasehold improvements Life of lease 34,578,826 1,817,763 32,761,063 24,241 Construction-in-process 13,216,732-13,216,732 - $ 85,633,035 $ 5,650,980 $ 79,982,055 $ 2,002,098 Property and equipment at June 30, 2011, consisted of the following: Estimated Accumulated Net Depreciation Asset Category Useful Lives Cost Depreciation Value Expense Land $ 5,800,235 $ - $ 5,800,235 $ - Building and improvements 28 to 40 years 31,331,276 2,523,089 28,808, ,576 Computer equipment 3 years 264, , ,812 65,153 Furniture and equipment 5 years 227, ,520 68,540 44,240 Leasehold improvements Life of lease 34,202,474 1,699,041 32,503,433 1,195,444 Construction-in-process 1,058,604-1,058,604 - $ 72,883,759 $ 4,484,948 $ 68,398,811 $ 2,185,413 Note 6. Capital Lease KIPP DC leases space at the former AIM Academy site under the provisions of a capital lease. The lease expires on January 31, The terms of the capital lease provide for monthly payments of $7,500 per month through August 31, 2015, with escalated payments for the remainder of the lease. Future minimum lease payments remaining are as follows: Years Ending June 30, 2013 $ 90, , , , ,000 Thereafter 3,014,134 3,476,134 Less amount representing interest $ (2,154,229) 1,321,905 11

14 Note 7. Notes Payable Long-term debt at June 30, 2012 and 2011, consists of the following: KIPP DC: District of Columbia Variable Rate Demand Revenue Bonds (KIPP DC Issue Series 2008); collateralized by an irrevocable direct-pay letter of credit issued by Manufacturers and Traders Trust Company, which expires May 15, 2015; interest rate adjusted weekly; monthly interest and principal payments due until May 1, 2039, when bonds mature. $ 26,050,000 $ 26,485,000 Note payable to The Reinvestment Fund; annual interest at TRF Prime plus 1%. The rate at June 30, 2008, was 6%. On September 3, 2008, the note was refinanced into a fixed rate note of %; monthly principal and interest payments due based on a 25-year amortization; a balloon payment is due in May ,147,970 2,191,909 Note payable to the Office of the State Superintendent of Education; annual interest rate of 4%; monthly principal and interest payments due based on a 25-year amortization; a balloon payment is due in May ,847,086 1,898,757 Note payable to The Reinvestment Fund; annual interest rate at 5%; monthly principal and interest payments due based on a 25-year amortization; a balloon payment is due in May , ,851 M&T Bank term loan agreement entered on September 22, 2011, for $5,500,000. This term loan has an interest rate of 2.5% above 30-day LIBOR, adjusting daily. Monthly principal and interest began in October 2011 and final payment is due in September The proceeds of the term loan were for the renovation of the Shaw Campus. 5,185,000 - KIPP DC Douglass QALICB, Inc.: New Markets Investment 40, LLC promissory note, fixed interest at %, payable monthly on the first banking day of each month. Balance due in full on May 9, Per the promissory note, in May 2016, the lender has the option to require prepayment in the amount of $7,786,486, and thereby, relieve KIPP DC of the remaining balance due. 13,859,486 13,859,486 Bank of America CDE I, LLC loan, fixed interest at 6.110%, payable monthly on the first banking day of each month. Balance due in full on May 9, ,000,000 10,000,000 (Continued) 12

15 Note 7. Notes Payable (Continued) KIPP DC Shaw QALICB, Inc.: City First Capital XX, LLC note payable agreement entered on October 4, Advances under this note shall bear interest from the date of this note until paid at the rate of 1.00% per annum. Interest payable in equal quarterly installments on the 15th of March, June, September, and December of each year. Commencing on December 15, 2018, and continuing on the 15th of March, June, September, and December thereafter until maturity on October 4, 2041, equal quarterly payments of principal and interest shall be paid. 17,705,702 - City First Capital XX, LLC note payable agreement entered on October 4, Advances under this note shall bear interest from the date of this note until paid at the rate of 1.00% per annum. Interest payable in equal quarterly installments on the 15th of March, June, September, and December of each year. Commencing on December 15, 2018, and continuing on the 15th of March, June, September, and December thereafter until maturity on October 4, 2041, equal quarterly payments of principal and interest shall be paid. 5,814,298-83,542,516 55,391,003 Less discount on notes payable (29,996) (63,027) $ 83,512,520 $ 55,327,976 These notes payable are secured by senior and subordinate pledges on per-pupil funding, senior and subordinate liens on net revenues, senior and subordinate deeds of trust on land and improvements, deeds of trust on ground leases and leasehold improvements, and guarantees from KIPP DC. Intercreditor agreements govern the allocation of this collateral. Annual principal payments on these notes payable at June 30, 2012, are due in future years as follows: Years Ending June 30, 2013 $ 2,842, ,112, ,110, ,945, ,601,000 Thereafter $ 54,899,764 83,512,520 Interest capitalized on these notes payable was $109,970 and $0 for the years ended June 30, 2012 and 2011, respectively. Interest expense was $1,781,348 and $1,655,444 for the years ended June 30, 2012 and 2011, respectively. In order to mitigate the risk of a floating interest rate on the Variable Rate Demand Revenue Bonds, KIPP DC entered into an interest rate cap agreement during the year ended June 30, The cost of the cap was $616,500. In exchange, KIPP DC has received rate protection not to exceed 4% through the end of the agreement, which expires on May 1, As a separate financial interest, KIPP DC carries the cap as an asset in the consolidated balance sheets at fair value. At June 30, 2012 and 2011, the value of the cap was $4,655 and $103,000, respectively. 13

16 Note 7. Notes Payable (Continued) In order to mitigate the risk of a floating interest rate on the M&T Bank term loan, KIPP DC entered into an interest rate cap agreement for the notional amount of $5,465,000 on September 27, The cost of the cap was $93,750. In exchange, KIPP DC has received rate protection not to exceed 5% through June 1, 2015 and 7.5% from June 1, 2015, through September 1, KIPP DC carries the cap as an asset in the consolidated balance sheets at fair value. At June 30, 2012, the value of the cap was $1,607. For the years ended June 30, 2012 and 2011, losses on the caps were $190,488 and $112,486, respectively. Note 8. Notes Receivable On October 4, 2011, KIPP DC loaned $17,705,702 to Chase NMTC KIPP DC Investment Fund, LLC. This was made to qualify for the NMTC transaction related to the Shaw Campus. This note bears an interest rate of 1.32% per annum. The note requires payment of interest only until December 25, 2018, and quarterly payments of $283,692 until maturity on October 4, Interest charged for the year ended June 30, 2012, was $173,339. Note 9. Temporarily Restricted Net Assets Temporarily restricted net assets at June 30, 2012 and 2011, are available for the following purposes, and net assets during the years ended June 30, 2012 and 2011, were released from restrictions by incurring expenses satisfying the restricted purpose. Net assets were released and are available for the following programs: Balance Released From Balance June 30, 2011 Additions Restrictions June 30, 2012 Purpose restricted: Elementary school development $ 312,500 $ 154,000 $ 312,500 $ 154,000 Teacher training - 432, , ,599 College access - 580, , ,000 Other academic support 62, , ,720 33,780 Facilities - 304, ,189 - Time restricted 610, , ,963 $ 985,446 $ 1,578,393 $ 1,766,497 $ 797,342 Balance Released From Balance June 30, 2010 Additions Restrictions June 30, 2011 Purpose restricted: Elementary school development $ 534,000 $ 3,500 $ 225,000 $ 312,500 Teacher training 13,558 38,000 51,558 - College access - 50,000 50,000 - Other academic support - 130,398 67,898 62,500 Time restricted 795, , , ,446 $ 1,343,349 $ 366,053 $ 723,956 $ 985,446 14

17 Note 10. Pension Plan KIPP DC maintains a defined contribution retirement plan (the Plan) that operates under Section 403(b) of the IRC. Employees are eligible to participate in the Plan on the first day of employment. KIPP DC determines the amount of employer contributions to be made to the Plan each year. Expenses incurred under the Plan were $1,055,210 and $791,715 for the years ended June 30, 2012 and 2011, respectively. Of the amount paid at June 30, 2012, $354,900 was paid from forfeited funds on KIPP DC s 403(b) Plan balance sheet. Note 11. Commitments And Contingencies Lease obligations: In March 2009, KIPP DC entered into a 35-year ground lease agreement for its Douglass Campus. This lease calls for monthly base rent payments and includes scheduled rent increases over the course of the lease term. The agreement also provides KIPP DC an option to renew the lease for an additional 15 years. In July 2010, KIPP DC moved to new headquarters space under an operating lease through December In addition, KIPP DC leases office equipment under operating leases for its headquarters and various school locations. In August 2011, KIPP DC entered into a 35-year ground lease for its Shaw Campus. This lease calls for monthly base rent payments. The agreement also provides KIPP DC an option to renew the lease for an additional 15 years. In the event that KIPP DC exercises the renewal option, the base rent shall be based on the fair market rental value of the property s use as a charter school. The future minimum lease payments at June 30, 2012, are as follows: Years Ending June 30, 2013 $ 647, , , , ,982 Thereafter $ 11,527,573 14,630,607 Federal grants: KIPP DC participates in federally assisted grant programs, which are subject to financial and compliance audits by the grantors or their representative. As such, there exists a contingent liability for potential questioned costs that may result from such an audit. Management does not anticipate any significant adjustments as a result of such an audit. Construction contracts: In July, 2011, KIPP DC entered in an agreement with a construction company to renovate a school facility KIPP DC is leasing from the District of Columbia for its Shaw Campus. The remaining value of the contract is approximately $1.8 million. 15

18 Note 11. Commitments And Contingencies (Continued) Put/call agreement: Pursuant to a put/call option agreement KIPP DC entered into on October 4, 2011, KIPP DC has the ability via either a put option being exercised by the owner or by exercising its own call option to purchase the membership interest in the legal entity that controls the loans to Shaw QALICB. KIPP DC anticipates purchasing those membership interests in October 2018 and dissolving all related legal entities and associated loans. Note 12. Fair Value Measurements KIPP DC follows the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The topic requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable market-based inputs or unobservable inputs corroborated by market data Level 3 Unobservable inputs not corroborated by market data In determining the appropriate levels, KIPP DC performs a detailed analysis of the assets and liabilities that are subject to the Fair Value Measurements and Disclosures Topic. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. There were no Level 3 inputs for any assets held by KIPP DC at June 30, 2012 and The table below presents the balances of the assets measured at fair value on a recurring basis by level within the hierarchy: 2012 Total Level 1 Level 2 Level 3 Money market funds $ 7,300,674 $ 7,300,674 $ - $ - Corporate certificate of deposit 6,855,768-6,855,768 - Interest rate cap 6,262-6,262 - $ 14,162,704 $ 7,300,674 $ 6,862,030 $ Total Level 1 Level 2 Level 3 Money market funds $ 7,300,562 $ 7,300,562 $ - $ - Corporate certificate of deposit 3,913,973-3,913,973 - Interest rate cap 103, ,000 - $ 11,317,535 $ 7,300,562 $ 4,016,973 $ - KIPP DC holds money market funds that are publicly traded on a stock exchange and are considered Level 1 items. The U.S. Government securities and corporate certificates of deposit are priced based on their stated interest rates and quality ratings. The interest and quality ratings are observable at commonly quoted intervals for the full term of the instruments and are, therefore, considered Level 2 items. 16

19 Note 12. Fair Value Measurements (Continued) The fair value of an interest rate cap is generally determined using models with forward-looking assumptions of interest rates and the effects on the underlying cash flows of the interest rate cap based on current market rates. The interest rates are observable at commonly quoted intervals for the full term of the instrument and are, therefore, considered Level 2 items. The table below reconciles total investments per Note 4 above: Investments at fair value $ 14,162,704 $ 11,317,535 Interest rate cap (6,262) (103,000) Investments at cost 8,900,000 4,800,000 $ 23,056,442 $ 16,014,535 17

20 Independent Auditor s Report On The Supplementary Information To the Board of Directors KIPP DC Washington, D.C. Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating and other supplementary information is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Gaithersburg, Maryland October 31,

21 Consolidating Balance Sheet June 30, 2012 KIPP DC KIPP DC KIPP DC/ Douglass Shaw Assets Woodrock QALICB, Inc. QALICB, Inc. Eliminations Total Current Assets Cash and cash equivalents $ 20,574,419 $ 347,816 $ 4,394 $ - $ 20,926,629 Investments 21,831, ,831,442 Receivables 4,329, (1,515,349) 2,813,891 Prepaid expenses 1,012,639 22,950 1,875 (147,750) 889,714 Promises to give 248, ,515 Total current assets 47,996, ,766 6,269 (1,663,099) 46,710,191 Promises To Give, net of discount and current portion 127, ,448 Unrestricted Investments 1,225, ,225,000 Restricted Cash 1,650,000-2,622,751-4,272,751 Restricted Investments 1,239, ,239,641 Deferred Rental Income 48,741 1,852, ,887 (2,661,031) 48,741 Note Receivable 17,705, ,705,702 Property And Equipment, net 33,489,500 24,409,884 22,082,671-79,982,055 Interest Rate Cap 6, ,262 Debt Issuance Costs, net 610, , ,412-1,572,648 Sinking Fund 38,341 20, ,344 Deposits 132,055-19, ,866 $ 104,269,550 $ 27,254,428 $ 25,900,801 $ (4,324,130) $ 153,100,649 Liabilities And Net Assets Current Liabilities Accounts payable and accrued expenses $ 1,692,089 $ 1,600,730 $ 1,783,503 $ (1,515,349) $ 3,560,973 Current portion of capital lease obligations 72, ,257 Current portion of notes payable 2,842, ,842,938 Deferred revenue 3,217, ,750 - (147,750) 3,217,103 Total current liabilities 7,824,387 1,748,480 1,783,503 (1,663,099) 9,693,271 Deferred Rent 2,728, , ,143 (2,661,031) 327,114 Capital Lease Obligations, net of current portion 1,249, ,249,648 Notes Payable, net of discount and current portion 33,290,096 23,859,486 23,520,000-80,669,582 45,092,300 25,763,799 25,407,646 (4,324,130) 91,939,615 Net Assets Unrestricted 58,379,908 1,490, ,155-60,363,692 Temporarily restricted 797, ,342 59,177,250 1,490, ,155-61,161,034 $ 104,269,550 $ 27,254,428 $ 25,900,801 $ (4,324,130) $ 153,100,649 19

22 Consolidating Statement Of Activities Year Ended June 30, 2012 KIPP DC KIPP DC KIPP DC/ Douglass Shaw Woodrock QALICB, Inc. QALICB, Inc. Eliminations Total Support and revenue: Pupil allocation $ 41,184,540 $ - $ - $ - $ 41,184,540 Contributions, grants, and events 4,030,303-80,370 (80,370) 4,030,303 Federal grants and entitlements 8,350, ,350,920 Investment income 60, ,242-77,946 Interest income 173, ,339 Sublease rental income 109,682 2,213, ,932 (3,039,847) 109,682 Loss on interest rate caps (190,488) (190,488) Other 406, ,886 Total support and revenue 54,125,402 2,214, ,544 (3,120,217) 54,143,128 Expenses: Program 37,513,737 2,381, ,252 (3,120,217) 37,154,527 General and administrative 4,189,238 79,345 51,137-4,319,720 Fundraising 507, ,971 Total expenses 42,210,946 2,461, ,389 (3,120,217) 41,982,218 Change in net assets 11,914,456 (246,701) 493,155-12,160,910 Net assets: Beginning 47,262,794 1,737, ,000,124 Ending $ 59,177,250 $ 1,490,629 $ 493,155 $ - $ 61,161,034 20

23 Consolidated Statement Of Functional Expenses Year Ended June 30, 2012 General And Program Administrative Fundraising Total Salaries $ 18,532,154 $ 2,216,425 $ 299,874 $ 21,048,453 Direct student expense 6,053, ,053,075 Payroll taxes and employee benefits 3,175, ,075 50,979 3,603,831 Occupancy costs 3,296, ,731-3,476,473 Depreciation and amortization 2,098,344 42,147-2,140,491 Interest expense 1,781, ,781,348 Office expense 1,092, ,484 34,481 1,658,875 Professional services and other fees 213, ,520 20, ,477 Staff development and staff events 394, ,080 2, ,361 Travel, outreach, insurance, subgrants, and licenses 516,479 34,258 99, ,834 $ 37,154,527 $ 4,319,720 $ 507,971 $ 41,982,218 21